AMD: As Graphics And Visual Business Overtakes Computing, Better Days Are Ahead

| About: Advanced Micro (AMD)

Advanced Micro Devices (NYSE:AMD) witnessed a sell-off in the wake of its fourth quarter results despite a solid outlook and fourth quarter earnings report.

The continued progress of the graphics and visualization business continues to drive results and operating margins going forward. I continue to see better days ahead for the firm, while reducing the reliance upon computing sales.

Fourth Quarter Highlights

AMD generated fourth quarter revenues of $1.59 billion for the final quarter of 2013, ahead of consensus estimates at $1.54 billion. Revenue growth was solid, increasing 38% compared to last year, being up by 9% compared to the third quarter.

Reported GAAP earnings came in at $89 million, or $0.12 per share. This compares to third quarter earnings of $48 million in the third quarter and a massive $473 million loss in the fourth quarter of last year.

On a non-GAAP basis, earnings came in at $0.06 per share, up two pennies on a sequential basis. Consensus estimates for non-GAAP earnings were seen between five and six cents. The fact that GAAP earnings were higher than non-GAAP earnings was thanks to a $48 million legal settlement gain.

Highlights Of The Earnings Report

The fourth quarter report highlights the first time that AMD's graphics and visual solutions business revenues surpassed those of the troubled computing solutions business.

The computing business reported revenues of $722 million, down 12.9% on the year before, and down by 8.6% compared to the third quarter. The unit reported an operating loss of $7 million, compared to a $22 million profit in the third quarter. Fewer chipset and notebook unit shipments are the driver behind lower revenues despite an increase in higher selling prices.

The graphics and visualization business reported revenues of $865 million, up 28.9% compared to the third quarter, and up by 165.3% compared to a year before. The business reported operating earnings of $121 million, significant improvements on a sequential and annual time fame.

Despite the strong sequential revenue growth, gross margins were under a little pressure thanks to strong growth at the graphical and visual solutions business which carries lower margins. Gross margins came in at 34.8% for the final quarter, down 86 basis points compared to the third quarter. Note that margins improved by nearly 20 percent points compared to a year earlier.

Despite the strong revenue growth compared to last year, the company managed to cut both research and development expenses as well as marketing, general and administrative expenses in actual dollars. Note that large past losses allow AMD to pay little in income taxes, with AMD making just a million tax provision.

A Review Of 2013

Few people believed that AMD could match annual revenues of 2012 in 2013, which the company almost managed to do. Full year revenues came in at about $5.3 billion. The $83 million net loss for the year compares to a massive $1.2 billion loss a year earlier, partially on the back of incidental charges.

Note that during the second part of the year, AMD made a lot of progress, showing healthy revenue and earnings growth on all time frames. The $1.2 billion in cash and equivalents gives the company sufficient liquidity, while the firm operates with a net debt position just shy of a billion.

Looking Into 2014

AMD's visibility for the future is not great, yet the company released a first quarter outlook. Revenues are expected to fall anywhere between 13% and 19% on a sequential basis.

This implies revenues of $1.33-$1.34 billion for the first quarter at the midpoint of the guidance, while analysts were looking for revenues of $1.36 billion. Despite this sequential decline, revenues are still seen up by nearly 23% on an annual basis. While this is a slowdown from annual growth rates of 38% in the fourth quarter, note that the fourth quarter last year was particularly weak.

The launch of Microsoft's (NASDAQ:MSFT) new Xbox and Sony's PlayStation consoles resulted in 7 million sales in just two months, boosting AMD's visual solutions business. The successful launches boosted revenue growth in the final quarter, despite an acceleration in the declines of the computing business unit. The graphics business has grown really rapid in recent quarters, now making up 55% of total revenues. This creates better growth dynamics as declining revenues of computing, driven by lower PC sales, will have less of an effect going forward given the diminished importance.

About a month ago I checked out AMD's prospects with shares trading at similar levels after Wednesday's sell-off. I acknowledged the pain of the computing business, driven by declining PC sales and strong competition from Intel (NASDAQ:INTC). I further concluded that the future of the business is dismal, with inferior gross margins and having access to much less financial resources compared to its bigger rival.

The graphical and visual solutions revenues of $2.19 billion for 2013 came ahead of my own expectations of $2 billion, while operating income totaled $216 million. I noted that if AMD was able to wind down its computing business at little cost, the graphical business could support the valuation alone. At $3.75 the equity in the business is valued at $2.7 billion, or roughly 1.2 times annual revenues and 12-13 times operating earnings. While this is a very nice niche, AMD will undoubtedly see pressure from competition going forward.

With the better than expected performance of the graphical business, I am a bit more optimistic about he company's prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.